Start with the data, unreliable as they may be. What immediately jumps out
... is the lopsided balance between consumption and investment..., for China
... almost half of G.D.P. is invested.

How is that even possible? ... The story that makes the most sense to me ...
rests on an old insight by the economist W. Arthur Lewis, who argued that
countries in the early stages of economic development typically have a small
modern sector alongside a large traditional sector containing huge amounts
of “surplus labor” — underemployed peasants making at best a marginal
contribution to overall economic output.

The existence of this surplus labor, in turn, has two effects. First, for a
while such countries can invest heavily in new factories, construction, and
so on without running into diminishing returns, because they can keep
drawing in new labor from the countryside. Second, competition from this
reserve army of surplus labor keeps wages low even as the economy grows
richer. ...

Now, however,... to put it crudely, it’s running out of surplus peasants.
That should be a good thing. Wages are rising; finally, ordinary Chinese are
starting to share in the fruits of growth. But it also means that the
Chinese economy is suddenly faced with the need for drastic “rebalancing”...
Investment is now running into sharply diminishing returns and ... consumer
spending must rise dramatically to take its place. The question is whether
this can happen fast enough to avoid a nasty slump.

And the answer, increasingly, seems to be no. The need for rebalancing has
been obvious for years, but China just kept putting off the necessary
changes...

How big a deal is this for the rest of us? ... Western economies are going
through their “Minsky moment,” the point when overextended private borrowers
all try to pull back at the same time, and in so doing provoke a general
slump. China’s new woes are the last thing the rest of us needed.

No doubt many readers are feeling some intellectual whiplash. Just the other
day we were afraid of the Chinese. Now we’re afraid for them. But our
situation has not improved.

Start with the data, unreliable as they may be. What immediately jumps out
... is the lopsided balance between consumption and investment..., for China
... almost half of G.D.P. is invested.

How is that even possible? ... The story that makes the most sense to me ...
rests on an old insight by the economist W. Arthur Lewis, who argued that
countries in the early stages of economic development typically have a small
modern sector alongside a large traditional sector containing huge amounts
of “surplus labor” — underemployed peasants making at best a marginal
contribution to overall economic output.

The existence of this surplus labor, in turn, has two effects. First, for a
while such countries can invest heavily in new factories, construction, and
so on without running into diminishing returns, because they can keep
drawing in new labor from the countryside. Second, competition from this
reserve army of surplus labor keeps wages low even as the economy grows
richer. ...

Now, however,... to put it crudely, it’s running out of surplus peasants.
That should be a good thing. Wages are rising; finally, ordinary Chinese are
starting to share in the fruits of growth. But it also means that the
Chinese economy is suddenly faced with the need for drastic “rebalancing”...
Investment is now running into sharply diminishing returns and ... consumer
spending must rise dramatically to take its place. The question is whether
this can happen fast enough to avoid a nasty slump.

And the answer, increasingly, seems to be no. The need for rebalancing has
been obvious for years, but China just kept putting off the necessary
changes...

How big a deal is this for the rest of us? ... Western economies are going
through their “Minsky moment,” the point when overextended private borrowers
all try to pull back at the same time, and in so doing provoke a general
slump. China’s new woes are the last thing the rest of us needed.

No doubt many readers are feeling some intellectual whiplash. Just the other
day we were afraid of the Chinese. Now we’re afraid for them. But our
situation has not improved.